Morgan Keegan Denies Fraud in Offering Defaulted Moberly Bonds

By Brian Chappatta -
May 13, 2013

Morgan Keegan & Co. is seeking to
dismiss a petition that claims the underwriter made fraudulent
statements when offering $39 million of now-defaulted municipal
bonds for an artificial-sweetener plant in Moberly, Missouri.

Missouri Secretary of State Jason Kander last month issued
a cease-and-desist order against Memphis-based Morgan Keegan for
“fraud and dishonest and unethical practices” in selling debt
for Mamtek U.S. to build the factory. Morgan Keegan denied those
claims in a May 3 filing with Kander’s office.

The battle between Kander and Morgan Keegan is the latest
in Moberly, a city of 14,000 that became one of the cautionary
tales of localities issuing debt for economic-development
projects in the $3.7 trillion municipal market. The Moberly
Industrial Development Authority, which sold the bonds in July
2010, was downgraded 13 levels by Standard & Poor’s to CC, or
junk, from A- in September 2011. S&P cut the agency two more
steps to D, its lowest, after a payment default in March 2012.

“Without Morgan Keegan’s involvement, this failed
investment would not have cost Missouri investors more than $6.5
million,” Kander said in an April 4 statement. “Companies have
a duty to disclose the risks of stocks and bonds before their
clients invest.”

Three Weeks

Morgan Keegan was a unit of Regions Financial Corp. (RF) when it
served as underwriter for the Moberly bonds. It was since sold
to Raymond James Financial Inc. Jana Strange, a spokeswoman for
St. Petersburg, Florida-based Raymond James, declined to comment
on Kander’s order.

The U.S. Securities and Exchange Commission and Texas are
also investigating Morgan Keegan for violating securities laws,
according to a May 8 filing from Regions Financial.

Moberly officials gave Mamtek Chairman and Chief Executive
Officer Bruce Cole initial approval for the $39 million of munis
within three weeks of his arrival in town. In September, the SEC
charged Cole with fraud and he was arrested.

Morgan Keegan misrepresented that Mamtek had a facility in
China that was producing sucralose when the bonds were offered
in 2010, according to Kander’s petition. He also said the
company misled investors when stating bond payments were backed
by Mamtek’s patents, when the company had none.

“Many problems existed with the offering, and if Morgan
Keegan had done its due diligence and investigated the
feasibility of Mamtek’s business plan, we would not be in this
situation,” Kander said.

The Moberly agency’s defaulted debt maturing in 2024 traded
on Feb. 14 at an average yield of 62 percent, or 8.56 cents on
the dollar, data compiled by Bloomberg show. That’s up from an
average yield of 33 percent when the securities last traded on
Dec. 11.